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Fair Funding Review - Relative Needs Assessment Consultation Response

12 March 2018

The Key Cities Group of local authorities welcomes the opportunity to respond to the Government’s technical consultation on the relative needs assessment as part of the Fair Funding Review.

About key Cities

Founded in 2013, Key Cities is a group representing 21 medium size cities in England and Wales, with political leaderships from both main parties.

Individually, we are termed mid-sized due to our populations. We are also mid-sized due to our economies; as put by Centre for Cities, we are ‘productive but constrained by our economic stature’. Our combined population is around 7.2 million with a GVA of £149 billion.

We share similar strengths and similar challenges, addressed through the four priorities of our Manifesto for Growth. Our ambition is to work with government and other regional and local partners to deliver an economy that benefits all our people and places, and contributes to a strong and successful Britain.

Empowering and investing in Britain’s medium size cities will support the ambitions within the Industrial strategy to build on our strengths and extend excellence into the future, close the gap between our best performing companies, industries, places and people and those which are less productive, and to make the UK one of the most competitive places in the world to start or to grow a business. Addressing poverty and inequality is one of the fundamental ways of creating more prosperous cities.

General Comments

Local authorities provide a wide range of public services – services that protect the most vulnerable, such as social care for adults and children, as well as other services, for example waste collection and disposal, libraries and leisure, housing, road maintenance, support for local buses, etc. The cost of delivering these services to a particular standard can vary across the country, due to differences in the level of service provision needed to meet that standard and also differences in input costs.

It is universally recognised that the current incentive based system local government finance system is inherently unfair and has eroded the previous links between the relative needs of local authorities and relative funding.

A priority of any funding system for local government must be to assess the Needs of local authorities – a major flaw in the current funding system is that it makes no provision for changing needs of local authorities over time. Need and resources were last fixed when the current 50% business rates scheme was introduced in the 2013/14 financial year, with a ‘promise’ of a reset at an undetermined point in the future. The local government landscape is very different now to what it was in 2010 with significant changes since 2013/14.

There is clear evidence that the gap between affluent and poorer authorities is widening with authorities with relatively high needs and low resources being left behind.

Equalisation and redistribution should be cornerstones of any local government funding system and we recognise that to balance these against incentives and rewards will be a difficult challenge. However, any future system/approach to needs and redistribution must first and foremost support local authorities to tackle inequalities and deprivation - equity and fairness being the overriding principles for the development of any new funding formulae.

In terms of the formulae that will underpin any funding system, our view is that simplicity itself should not be a major driver – it is more important that any new approach is fair. The formulae used up until 2013/14 were developed over a number of years and were necessarily complex, a complexity that reflected local services and needs and which was, in the main, accepted by local authorities as a system that distributed resources fairly. Even with a complex system, there were anomalies and outliers and if there had been a simple way of allocating resources fairly, it would have already have been found and implemented. For example, a simple distribution based on population/geography alone would result in huge changes, with funding flowing from areas with high needs to those where needs are much lower – this would be clearly unfair and unpalatable.

Our preferred approach would be to start simply and be prepared to add complexity to make the formulae as fair as possible, but only as far as is necessary. We would also stress that any new formulae will also need to be transparent and explicable, and not overlaid with unnecessary complexity that serves only to confuse – all local authorities should be able to understand their own position and how this relates to other councils.

The funding cuts to local government since 2010 have, by necessity, led to an increasing focus on statutory services and those which support the most vulnerable in society, in particular on children’s services and adult social care. As these two services make up a significant proportion of the expenditure of many upper-tier and single tier authorities, we believe that it is only right that the most effort is directed toward making sure that the formulae for these services correctly reflect the needs at a local authority level. Properly resourcing local authorities to manage the demand pressures in these critical areas will clearly benefit the wider public sector.

In these times of austerity and reducing resources, we also feel that the principle of equalisation is more important than ever, it is vital that the new formulae will enable all authorities to provide a reasonable minimum level of service to meet the often rapidly changing local demand pressures they face.

In terms of timing of the implementation, Key Cities remain extremely concerned about the short period of time between the outcomes of the next Spending Review and the Fair Funding Review and the need for Council’s to set their budgets for the 2020/21 financial year and beyond. As a general principle, we would support stability in funding allocations which helps local authority financial planning.
Key Cities would also continue to urge Government to recognise the significant pressures on local authority budgets and consider the quantum of the funding for local government at the same time as considering how that funding should be distributed.

Finally, Key Cities are willing and able to work with Government and other local authorities to develop and implement a fair funding system for local government that is equitable, transparent and will enable local authorities to drive economic growth and tackle poverty and inequality in our communities.

Responses to specific questions

1) What are your views on the Government’s proposals to simplify the relative needs assessment by focussing on the most important cost drivers and reducing the number of formulas involved?

Clearly, defining and measuring the spending needs of different local authorities is difficult. The overriding objectives of simplicity and fairness can be competing principles.

Our view is that simplicity should not be at the expense of fairness and transparency and that the priority should always be given to making any resource distribution system as equitable and fair as possible.
We support the focus on the most important cost drivers but the review must recognise the breadth and complexity of local authority service provision and the financial challenges that the sector is facing.
The system needs to start simple and add complexity as needed.

2) Do you agree that the Government should use official population projections in order to reflect changing population size and structure in areas when assessing the relative needs of local authorities?

Population is recognised as the key cost driver. We support this proposal and support the principle of using forecasts which should reduce the impact of changes between system resets.

3) Do you agree that these population projections should not be updated until the relative needs assessment is refreshed?

We broadly support this but would stress the importance of updating the relative population data and needs assessments relatively frequently in order to recognise any major changes in demography. Government could also provide additional ‘emergency’ funding for areas with significant increases in population/demography.

4) Do you agree that rurality should be included in the relative needs assessment as a common cost driver?

Rurality/sparsity should be included as a common cost driver but only if there is robust evidence to support that it leads to increased costs. Care should be taken to avoid double-counting with other cost drivers.

5) How do you think we should measure the impact of rurality on local authorities’ ‘need to spend’? Should the relative needs assessment continue to use a measure pf sparsity or ae there alternative approaches that should be considered?

Further research and evidence is needed to assess the impact on key service areas and costs and whether rurality and sparsity is actually a major cost driver.

In addition, research should also be undertaken to determine whether ‘density’ can also mean additional costs for those local authorities operating in urban areas.

6) Do you agree that deprivation should be included in the relative needs assessment as a common cost driver?

Yes, we are firmly of the opinion that deprivation, and people’s ability to pay, should be included as a common cost driver within the foundation formula and recognised, where appropriate across the service specific cost drivers. Deprivation is closely linked with a wide range of health inequalities and data shows that there is a large gap in healthy life expectancy between more deprived and less deprives areas. This will result in additional costs to local authorities in delivering services.

7) How do you think we should measure the impact of deprivation on ‘need to spend’? Should the relative needs assessment use the Index of Multiple Deprivation or are there alternative measures that should be considered?

Yes, in the absence of other ways to measure deprivation, in principle we are not opposed to the use Index of Multiple Deprivation data which is well established and detailed to local authority and ward level. However, there should be recognition that these by nature are made up of constituent variables and given the importance of deprivation as a cost driver, we would strongly urge Government to explore alternative ways to measure deprivation.

As with other cost drivers there should be an objective process around the weighting.

8) Do you have views on other common cost drivers the Government should consider? What are the most suitable data sources to measure these cost drivers?

Key Cities agree with the Government’s proposal to use population, rurality and deprivation as the set of common cost drivers, supplemented by specific formulae. As mentioned in the response to question 5, Key Cities would strongly urge Government to consider (properly evidenced) population density as a cost driver. We would also urge Government to consider the unique characteristics of coastal towns and cities and, if there is evidence to support, include costs drivers to reflect this.

9) Do you have views on the approach the Government should take to Area Cost Adjustments?

Some areas do face the issue of higher input costs and as such Key Cities generally welcomes the consideration of area costs as a cross-cutting cost driver. Key Cities will look forward to responding to the separate technical discussion paper that Government is planning in this area.

Government should also consider where there might be additional costs arising from having a limited market for the provision of services within specific sectors, for example children’s specialist placements, in certain geographical areas.

Again, as with all cost drivers any approach should be objective, transparent and evidence based and care should be taken to avoid the risk of double-counting.

10a) Do you have views on the approach that the Government should take when considering areas which represent a small amount of expenditure overall for local government, but which are significant for a small number of authorities.

Key Cities recognise that there may be some areas identified that may require a separate approach. Government could use specific grant funding which would have the benefit of keeping these relatively minor/isolated issues outside of the relative needs assessment. Of course, any decisions around funding outside of the formula funding system should still be objective, transparent and clearly evidenced.

10b) Which service do you think are most significant here?

The revenue costs around flood defence, Asylum Seeking Children. Also, local authorities have a clear place-shaping role and costs to support and drive regeneration and economic growth should be recognised.

11a) Do you agree the cost drivers set out above are the key cost drivers affecting adult social care services.

11b) Do you have views on what the most suitable data sets are to measure these or other key cost drivers affecting adult social care services?

Adult Social Care represents the highest area of spend of Key Cities with significant continuing pressures around rising demand and other inflationary factors. The long-term funding arrangements for Adult Social Care are uncertain, particularly around the future of the improved Better Care Fund.

Whilst the proposed factors look broadly reasonable, given the importance of this area of spend on local authority budgets we urge Government to focus effort into identifying suitable cost drivers and that the work on the funding formula should be closely linked to the Adult Social Care Green paper.

In addition, one area that would be worthwhile investigating is the level of wealth within a local area – those areas with proportionately less wealth and thereby fewer people that are able to self-fund their own care will place greater pressure on local authorities to fund higher proportions of adults/older people who require social care support.

12a) Do you agree that these are the key cost drivers affecting children’s services?

12b) Do you have views on what the most suitable data sets are to measure these or other cost drivers affecting children’s services?

Children’s Services spend represents an area of significant spend across local authorities with significant pressures on local authority budgets, particularly those local authorities in areas of relatively high levels of deprivation.

Whilst the suggested drivers look reasonable, Key Cities believe that this is an area where additional, specific research is needed and welcomes the work to establish a stronger evidence base on the cost drivers in Children’s Services. Other potential cost drivers could include;

Prevalence of parental mental health and substance misuse

Levels of domestic abuse where there is a child in the household

Levels of youth offending – either first time or repeat offending

Key Cities recognise the clear link to the sustainability of school funding (via the Dedicated Schools grant) and urge Government to recognise this inter-relationship.

13a) Do you agree that these are the key cost drivers affecting routine highways maintenance and concessionary travel services?

13b) Do you have views on what the most suitable data sets are to measure these or other key cost drivers affecting routine highways maintenance or concessionary travel services?

The proposed cost drivers appear reasonable.

If forecast snow days/predicted grit days is to be included then this ought to be based on data that can be updated.

14a) Do you have views on what the most suitable cost drivers for local bus support are?

14b) Do you have views on what the most suitable data sets are to measure the cost drivers for local bus support?

Population and rurality/density would seem to be the most suitable cost drivers. In addition, reimbursement for concessionary travel represents a significant proportion of bus operator income and therefore the viability of the network and the number of bus routes that do not cover operating costs. Reimbursement is therefore closely linked to the level of network coverage that is operated commercially without local bus support and therefore the level of reimbursement is also a cost driver for local bus support.

15a) Do you agree that these are the key cost drivers affecting waste collection and disposal services?

15b) Do you have views on what the most suitable data sets are to measure these or other key cost drivers affecting waste collection and disposal services?

The proposed cost drivers appear reasonable. Whilst households is an important cost driver it is also important to know the number of people living in a household as this will be a cost driver – for example, two authorities may have the same number of households but if one has an average of 3 people per household and the other has an average of 4 people the latter would produce more waste.

As with all cost drivers, care needs to be taken to avoid the effect of duplication – for example around rurality/sparsity.

16a) Do you agree these remain the key drovers affecting the cost of delivering fire and rescue services?

16b) Do you have views on which other data sets might be more suitable to measure the cost drivers for fire and rescue services?

The proposed cost drivers appear reasonable.

17a) Do you agree that these are the key cost drivers affecting the cost of legacy capital financing?

Outstanding debt and interest rates are the key cost drivers.

17b) Do you have views on what the most suitable data sets are to measure these or other key cost drivers affecting legacy capital financing?

MHCLG will already hold data from previous settlements.

18a) Are there other service areas you think require a more specific funding formula?

Previous formulae have included an Environmental, Protective and Cultural Services block. Presumably these services will be reflected in the foundation formula. Non-HRA housing support such as homelessness, housing welfare and temporary accommodation should be considered as this is a key area of pressure for a number of local authorities. If, as indicated funding for Public Health is to move from specific grant funding to formula funding then there should be a service specific formula. For coastal authorities, there are areas of spend that are not reflected, these include Sea Fisheries, costal defence and flood defence – appropriate cost drivers would be length of coastline, number and length of waterways, etc.

18b) Do you have views on what the key cost drivers are for these areas, and what the most suitable data sets are to measure these cost drivers?

The common cost drivers – population, rurality, deprivation and area cost adjustment– are key cost drivers.

19) How do you think the Government should decide on the weights of different funding formulas?

Transparency and objectivity will be critical and weightings should be based on evidence. One option would be to use existing data on spend by all local authorities with adjustments for outliers/anomalies.
However, given that the consultation states that control totals will have to be constrained to the level of funding available through the Settlement, Key Cities believe that it will be very difficult to implement the necessary level of change without additional funding for local government.

20) Do you have views about the statistical techniques the Government should consider when deciding how to weight individual cost drivers?

Key Cities recognise that the use of statistical techniques is a complex and specialist area. Whilst there are concerns about the use of regression it would provide a relatively simple and understandable methodology. Whatever method(s) is used it needs to have rigour and be robust.

Regardless of the techniques used, the draft results of the formula should be “sense checked” to ensure that the distribution (on a per head basis) looks reasonable and avoids the unfairness of the current settlement.

Although we would not want any specific approaches to be ruled out at this stage, we have a strong preference for techniques that minimise subjectivity and judgement.

21) Do you have any comments at this stage on the potential impact of the options outlined in this consultation document on persons who share a protected characteristic? Please provide evidence to support your comments.

Our view is that it is too early to comment specifically on the potential impact on persons who share a protected characteristic until more detail is available.